Financial Focus: Early IRA Funding Can Pay Off Over Time

You’ve got until April 17 to contribute to your Individual Retirement Account (IRA) for the 2011 tax year. That’s not a lot of time, but if you have some money available and you haven’t completely funded your IRA for 2011, consider doing so before the deadline. And once you’ve “maxed out” on your IRA for last year, why not get a jump on 2012?

Actually, you could have started contributing to your 2012 IRA as early as Jan. 2. In fact, if you can get into the habit of fully funding your IRA each January, you’ll give your money 15 extra months of growth potential, as opposed to waiting until mid-April of the following year. If you factor in all the years you’ll be contributing to your IRA before you retire, those extra months of growth opportunities, repeated over decades, could end up providing you with a fair amount of extra cash when you start tapping into your IRA at retirement.

Of course, you may not find it all that easy to come up with the full IRA contribution amount at one time. (In 2012, you can put up to $5,000 into a Roth or traditional IRA, or $6,000 if you’re 50 or older.) But if you look at your entire financial picture, you may be able to think of some resources. Here are a few suggestions:

•Put your tax refund to work. In 2011, the average tax refund was about $3,000, according to the IRS. If you received that amount in 2012, and you applied it toward your IRA, you would already have met half the contribution limit (if you are 50 or older) or more than half (if you’re younger than 50).

•Take advantage of interest payments or dividends. If you own income-producing investments, you may find that they can help you fund your IRA early. For example, if you own dividend-paying stocks, and you don’t typically reinvest the dividends, consider putting some of these funds into your IRA. (Keep in mind, though, that stocks can reduce or discontinue dividends at any time). And you can do the same thing with any interest payments you receive from bonds.

•Put other “windfalls” into your IRA. If you receive a windfall, such as a bonus from your employer or a gift of cash, think about putting it into your IRA.

If none of these options present themselves, and you can’t afford to write out a big check to fund your IRA very early in the year, do the best you can to reach the contribution limit as soon as possible. To make this happen, consider setting up a monthly automatic transfer from your checking or savings account into your IRA. Even if you were to divide these transfers into 15 equal payments totaling $5,000 (or $6,000 if you’re 50 or older), you would still be funding your IRA more quickly than if you would have scrambled to contribute in the last few months before the tax filing deadline.

No matter when you do it, fully funding your IRA is a great way to help build resources for retirement. But the earlier, the better — so do whatever you can to beat that tax deadline each year.

Edward Jones financial adviser Yvonne Catton’s office is at 850 Main St., Suite 104, in the Day Promenade building in Ramona. She may be contacted at 760-789-2804.